Managing Mental Accounts: Payment Cards and Consumption Expenditures.

This article investigates whether mental accounting—the cognitive process by which individuals categorize and manage finances in separate “mental accounts”—affects total consumption expenditures. Using a unique natural experiment in Israel where individuals exogenously received a new store credit card without prior request, the study finds that consumers temporarily increase total spending on the new card without reducing expenditure on their existing cards, indicating that payment methods are treated as nonfungible budget categories. This increase in consumption is temporary, lasting about a year, and is not accompanied by higher indebtedness or driven solely by liquidity constraints or income shocks. The findings suggest that mental accounting influences overall spending behavior and have implications for the design of fiscal stimulus programs and monetary policy, as new payment methods may create distinct mental accounts that temporarily boost consumption.